Market driven

Although road user charging is viewed as a major future opportunity for the Galileo global positioning system, debate rages over whether it is the 'killer' road sector application. Here, Bain & Co. Italy's Pierluigi Serlenga, writing of behalf of GIROADS, looks at the business opportunities and market factors that will drive adoption.

A burning question for many is what uses the road sector will make of Galileo, Europe's satellite navigation programme, once it is operational. A handful of killer applications for the motoring community, namely road user charging, emergency service management or pay-per-use insurance, should not hide from view the many other services rendered possible through Galileo's position precision and guaranteed integrity.

No fewer than 22 separate applications were inventoried, classified and assessed in the course of the market study carried out within the GIROADS Project. As market research shows, it is bundles of such services—some commercially attractive, others socially desirable - which will drive market penetration amongst the consumer and business ends of the market.

The consumer segment
Appealing to the wider consumer segment (users of private vehicles) requires the adoption of mass-market strategies based on the classic 'four Ps' - product, price, promotion and place. These are dealt with in order below.

In terms of product, consumers are primarily interested in infomobility services, however preferences tend to vary according to the type of application (navigation is the most popular, followed by e-services) and the customer profile (younger consumers like more navigation/technical features, older and busier consumers prefer traffic information services). Customers will always prefer an easy-to-use product or service which they are likely to use frequently. This implies that services need to be bundled together to ensure that the most popular services drive purchase patterns.

The consumer sector is notoriously price-sensitive. Consumers are willing to pay more for some features (mainly Location-Based Services (LBS)) and less for others (safety), the willingness to pay is directly correlated to the age group. The pricing model must therefore be designed as a package in a way that core features pricing also covers the costs of features for which the consumer is not willing to pay but which may be socially desirable.

The consumer market is characterised in general by a low awareness of the services and related benefits offered by GNSS-based applications. Promotional efforts must therefore be increased either directly to the end users or through intermediaries, such as car dealerships, and tailored to different target preferences (for example, by stressing technological components for younger segments but comfort features for families).

Finally, interest in the availability of navigation systems and LBS tends to increase with the frequency of mobile phone use. This suggests an overlap of the navigation and mobile/consumer electronics markets, which is determinant in terms of placing. In the future, navigation system packages could well be sold via consumer electronic retail stores or on the Web, besides car dealerships.

To maximise penetration and usage of Galileo in this market, the bundled offer and pricing must be structured so that 'pull' services—that is, the ones which the customer likes most and is willing to pay for—are the core of the marketed bundle, while the push services—the ones which have social benefits/regulatory push but are associated with a low willingness to pay—are given 'free' in the bundle as an option to the consumer. To evaluate if it is pull or push, each service has been positioned in a matrix where appeal/willingness to pay and legislation requirement/social benefits can be seen.

Attempts to establish a pricing scheme based on case studies in the UK and Italy for roadside assistance services suggest that consumer willingness to pay for such bundles can be evaluated at o8-12 per month (communication included), with a decreasing trend going down to o5-8 a month by 2020.

The business segment
The business segment differs significantly from the consumer in terms of preferences and impact on optimal business model. Driven by constant efforts to increase productivity and cut costs, this segment is keen to have—and is willing to pay a premium for—services that decrease operating costs, such as vehicle management and traffic information (both of which lead to a more efficient use of the vehicle and route optimisation). However, preferences and willingness to pay vary strongly according to business characteristics, such as the nature of the goods to be transported, the length and scope of journey, the size of vehicle and of the fleet. Hence, market research pinpoints that packages, pricing and distribution cannot be designed with a 'one-size-fits-all' logic. Rather, there is a dependency on a number of variables, chief amongst which are willingness to pay and regulatory requirements.

In order to maximise penetration and usage, the offer to the business segment needs to be split into a basic low-price package, which includes the features which appeal to all or are mandatory by law, and specific on-demand add-ons tailored to the exact needs of niche business segments.

The basic package should typically include LBS (such as vehicle management and remote diagnostic), Electronic Fee Collection (EFC), emergency services and pay-per-use insurance priced at a flat subscription fee to solve connection and roaming costs problems and simply administration. Premium on-demand packages, including tracking and tracing and/or fleet management services, should be available as optional additional services. The resulting pricing scheme must be flexible in order to give the option to buy one or several services on a variable consumption basis, according to client preferences and needs.

In light of the advantages that the Galileo signal will offer, the overall package (basic + add-ons) could be charged at o100-130/month per vehicle with an average annual price decrease of 3 per cent to factor for potential competition increase. Projections carried out suggest that the European business market for the road sector could be worth o16.5 billion per year by 2020.

This figure translates into new business opportunities for all key suppliers of the value chain (motorway operators, device manufacturers, insurance companies and so on), even taking into account possible cannibalisation of existing services. For instance, motorway operators typically stand to gain up to o6/customer every year through reduced payment fraud, elimination of roadside infrastructure and commercialisation of value-added services.

The role of the regulator
Naturally, the Galileo market is not solely driven by market logic and user demand. Through legislation and investments, public authorities have a role to play in supporting applications penetration and usage, particularly at the very beginning of service availability, by favouring interoperable technological platforms, pushing the adoption of some safety- and security-critical services, investing in projects which are unsustainable for individual firms but necessary collectively, and building networks to link various actors in the value chain.

A key conclusion of the GIROADS regulatory survey was that only a limited number of road sector applications are currently governed by EU regulation, good examples being EFC (COM/2004/52) or livestock transport tracking (Council Regulation 1/2005). By contrast, a number of transversal areas of legislation, such as human-machine interfaces, data privacy and communication standards—not initially devised with transport in mind—are expected to have a structuring impact on Galileo road sector solutions. When tailoring the proposed service package to the different segments, the 'drive' of legislation is considered to define if a feature should be introduced, and whether it should be charged for. Moreover, the impact of existing or planned legislation needs to be considered when projecting the service penetration. For instance, it could be argued that given its social impact, emergency service provision should be included in all packages, even at no cost.

In addition, GIROADS has identified a number of possible 'show-stoppers' where lack of action at European level could harm the market perspectives of Galileo. For instance, the need for strict legislation for safety-of-life and liability-critical applications is indisputable; without it these applications would be non-viable from a commercial point of view. No business would offer such services without legal protection, for instance in the case of a loss of life. Moreover, the development of a legal framework which recognises GNSS position data as evidence in courts of law and against fraudulent claims has not yet been implemented at European level.

GIROADS does not recommend that there should be any specific legislation requiring the use of Galileo. However, it is important that those responsible for the development and implementation of national and European regulatory frameworks recognise that road-based applications will be more efficient (or better in some other way) if they use Galileo than otherwise.

Conclusion
Based on this broad analysis, the market for GNSS road sector applications can be characterised by a long break-even period in all scenarios analysed (meaning that the service provider must be operationally and financially able to sustain long return-on-investment periods), a strong sensitivity to price changes (negative price changes are not unlikely due to possible changes in the competitive environment) and a significant impact of the regulatory environment which will require the EU and Member States to be prepared to accompany the market introduction of GNSS road sector applications through a positive legal framework that makes the most of Galileo's signal integrity.

GIROADS
GIROADS (GNSS Introduction in the ROAD Sector), a 24-month project commissioned by the Galileo Joint Undertaking (GJU) with funds from the European Commission's 6th Framework Programme for Research and Technology Development, will aggregate the road community's proposals to facilitate the technical and commercial introduction of Europe's satellite navigation programme to the road transport sector.

The road sector represents one of the largest mass markets for GNSS technology applications both in terms of numbers of users and business volume, with a continuous growth of demand expected in the next decade. The underlying philosophy behind the GIROADS Project is that a number of key applications have the potential to become enablers of transport policy as a whole while giving rise to commercially viable service provision schemes of interest to a wide range of stakeholders